Day trippin'

Carlton Whitlock is about to lose money -- a lot of money, fast. Perched before a computer at a Far North Dallas office, the 39-year-old Garland man will soon see $1,600 evaporate in less than an hour. Four weeks have passed since Whitlock quit his $100,000-a-year marketing job at Nortel Networks to earn a living as a day trader in stocks, and his new career is not going well.

But give him a minute -- that's about all it takes -- and he may be back in the black. Maybe.

"This guy bounces all the time," Whitlock says as he eyes a grid on his computer monitor showing the stock price of Phone.Com Inc., a start-up Internet company.

Whitlock's screen displays what is called Level 2 online programming, which reveals the minute-by-minute fluctuations of stock prices in real time as Wall Street exchange dealers buy and sell. Since the technology became available three years ago, Level 2 programming has spawned an industry filled with people like Whitlock, who gamble that they can track and anticipate rapid shifts in prices, trading quickly to capitalize on small changes.

Whitlock places his bets in the offices of an 18-month-old company, 1 800DAYTRADE.COM, one of four local operations that cater to day traders. The Securities and Exchange Commission estimates that fewer than 7,000 people trade full time with nearly 100 similar companies nationwide, although day traders account for roughly 15 percent of the NASDAQ's daily volume.

Whitlock sits hunched in a high-backed swivel chair before one of about 30 monitors arranged atop four long, black Formica tables in an office the size of a school classroom. Five minutes earlier, he clicked a mouse button to buy 200 shares at $224 a share of Phone.Com, a company with no profits that makes software that enables delivery of Internet services like e-mail, news, and stock quotes.

"I may hold on to it for a few hours," Whitlock says as he watches the price quickly drop several points. (A point equals $1 in the market price of a stock.)

But within 30 minutes, Whitlock loses his patience and his money. The sole provider for his wife and two teenage children, Whitlock peers at one of two televisions tuned to the financial network CNBC. The Dow Jones and NASDAQ indices -- broad measures of the stock market's health -- are going south.

"No wonder," Whitlock mutters to himself, a habit he has adopted since he started day trading. With the click of a button, he sells his shares for $216 each, eight points below what he paid for them minutes earlier. The transaction represents a $1,600 loss -- his largest ever, he says -- plus the $44 he has to pay the day-trading firm in fees.

"I should not have done that," Whitlock says, grimacing. "I am too new at this."

Why would anyone give up a high-paying job to become a day trader? Greed is the obvious answer. You can buy 1,000 shares of a stock, see it rise a quarter of a point after five minutes, and sell it instantly for a $250 profit, minus brokerage fees. That's not bad for inside work with no heavy lifting.

As Whitlock's unpleasant afternoon shows, you can lose money just as quickly. Since July 29, when Atlanta day trader Mark Barton killed himself and 12 other people, leaving a note that cited his $500,000 in losses, industry experts, the SEC, and legislators have been investigating the downside of day trading. (The Atlanta episode often arises in conversations with traders. "Remember what we day traders do when we get mad," one man joked when he learned a reporter was at 1 800DAYTRADE.COM's offices.)

The experts and regulators who argue against day trading make a strong case based on a simple, persuasive point: Most day traders lose money. The North American Securities Administrators Association published a survey in August that analyzed the accounts of 30 day traders. Seventy percent were not profitable. Moreover, the study said, the traders it reviewed operated in a manner that virtually guaranteed they would lose money -- taking profits too quickly and letting losses run.

Regulators and other experts also fear that guileless traders are being duped. They warn that brokerage firms engage in false advertising, do not properly screen customers, and lend too much money to their clients, ensnaring them in debt. Traders must deposit money with the brokers to begin trading, but can borrow additional money to invest through what are called margin accounts. New rules instituted by the stock exchanges now prohibit firms like 1 800DAYTRADE.COM from lending investors more than twice what is in a trader's account.

The National Association of Securities Dealers has recommended that the SEC go further and require disclosure statements for day traders that would allow brokerage firms to screen out "persons of limited resources and limited investment or trading experience and low risk tolerance."

The SEC revealed in September that it had referred 10 day-trading firms to its enforcement division for inappropriate advertising. "The commission is most concerned with unbalanced advertising and exaggerated claims of profitability -- in other words, advertisements that detail the benefits of day trading without disclosing the associated risks and costs," SEC Chairman Arthur Levitt told a congressional subcommittee. "In some cases, representations by day-trading firms that promise profits without disclosing the inherent risks of the day-trading strategy, including available information on probability of profit, may rise to the level of fraud."

Darla Bartkowiak, president of 1 800DAYTRADE.COM, says her firm has never been investigated by the SEC. The company's advertising, which includes a large billboard near its Preston Road offices, never oversells the possibilities of day trading, Bartkowiak says, and the company's logo is simply "The new frontier in trading." (That new frontier is found in an office tucked between a Vietnamese restaurant and a kick-boxing school.)

At the Dallas company's training classes, Bartkowiak says, new traders are told to practice at least a week before they start trading real money and stick to trades of 100 or 200 shares until they gain confidence.

But even the Electronic Traders Association, an industry group, is less than sanguine about the odds confronting day traders. An informal survey by the association found that 60 percent lose money in the first three to five months of trading. After that, the ETA claims, those who can still afford to play average $25,000 a month in profits. Yet that average is deceptive: Only a few traders score riches. The rest -- about 60 percent -- lose $6,000 to $8,000 a month, the study concedes.

Despite the Senate hearings, the SEC machinations, and the warnings from experts, most days about 20 traders gather in the suite where Whitlock does business. The number varies depending on how recently 1 800DAYTRADE.COM has offered one of its five-day seminars to attract newcomers, and the firm says it has about 200 active day traders.

Traders need a minimum of $25,000 to open an account, although the firm's managers say they sometimes make exceptions. Traders can pay $300 a month plus $19 for each transaction to get the online service fed to their home computers. If, like Whitlock, they work out of the trading office, there is no monthly fee and each transaction -- buying or selling -- costs $22.

After 1 800DAYTRADE.COM offers a weekend class, most seats in the trading room fill up, Whitlock says, but within a few weeks only the hardy remain. The others typically have exhausted their capital and gone back to drudgery.

"I haven't seen you around for a while," one trader calls out to a man who pokes his head into the trading-room door and looks around longingly for a few minutes. "I go to work now," the new arrival explains dejectedly. "It wasn't on purpose."

The traders at the 1 800DAYTRADE.COM offices are almost exclusively male. Only one woman, who works part-time as a receptionist at the company to help pay her way, trades there. Others use the service at home. One woman, who trades at home "in her bathrobe," says she made $150,000 last year, only to lose $75,000 in the past six months.

Whitlock likes the trading room. "I learn while I'm in here," he says. But the ambience in the trading office is not for everyone. Long, tense silent stretches -- where only the low volume of CNBC and an occasional shrill cell phone are heard -- are punctuated by boisterous moments of ribald humor among the traders. "You sound like a squealing pig," one trader booms for all to hear when his neighbor tries to blow his nose discreetly.

Three veteran day traders (that means they have more than six months' experience) sit behind Whitlock. The three appear to be trading profitably. Evan Rogers, who teaches the course offered to 1 800DAYTRADE.COM's new clients, is one of the three, and he trades the assets of a partnership that includes some of the firm's owners.

Typically, they base their moves on tips from online services and news channels. They also spend time looking at the graphics on their computers, charting stock prices. They follow monthly and daily trends. Rarely do they focus on the fundamentals of a company's finances -- they're not investors, they say; they're traders.

The veterans can make newcomers like Whitlock feel like an outsider. Easily overheard from Whitlock's station, the back-row veterans engage in conversations about the good life awaiting successful traders. They buy fancy cars. ("Is $34,000 a good price for that?" one trader asks a friend in a loud phone conversation about a 1994 Corvette coupe.) Their wives have rich tastes. (One spouse wants only leather furniture, a veteran trader tells the others.) Their vacations are fun. ("My catch was no smaller than 6 inches," a buddy brags about his fishing expedition.)

Whitlock can also eavesdrop as the veterans pass one another trading tips and compare daily profits ($25,000 or more on good days, they say).

Whitlock is not in their league. He trades mostly in companies responsible for basic Internet technology, an industry he believes he knows well because of his former days at Nortel, a telecommunications company based in Richardson. He also intends to stick to trades of fewer than 300 shares until he learns the business better. The low volume means smaller profits, but smaller losses too. Nevertheless, he has already lost $11,000 out of the $40,000 in capital he started with six weeks ago.

He's not ready to quit yet. "What I really see is potential," Whitlock says. That, and a life free from corporate demands.

When Whitlock clicks on the buy or sell button on his monitor, a message is sent through an electronic communications network directly to the system controlled by the exchange (NASDAQ or New York Stock Exchange) for matching trades. Typically, Whitlock and other traders send limit orders -- offering to buy or sell at a set minimum or maximum price.

After he sends his transaction into the ether, Whitlock can see exactly where his trade is ranked among all the others being offered. The exchanges' systems class the trades according to their price, size, and time of entry. Whitlock's buy order for a stock is completed when it is matched with someone looking to sell at the same price, and vice versa.

Theoretically, a day trader should be on the same playing field as Wall Street stock dealers. They have the access to the same information and the same instantaneous trades. Known as market makers on the NASDAQ and as specialists on the New York Stock Exchange, the Wall Streets dealers are brokerage houses and banks that have agreed to sell and buy a stock to make the market move in an orderly fashion. On the NASDAQ, there are an average of 11 dealers on any given stock. If there's a sell-off and no buyers appear, a dealer must step up. But most of the time dealers operate to their own accounts' advantage.

For the day trader, it's often a guessing game about what the dealer is going to do. Small investors can now see what previously had been the purview only of Wall Street dealers, but day traders do not have the stock inventory or financial resources to compete evenly with Wall Street investment banking firms.

After a day trader places an order, much can happen that remains out of his control. Heavy demand can force the bidding higher. The supply can be exhausted and the stock no longer available.

Then there are the computer glitches. One of Whitlock's fellow traders had his worst day -- losing $4,000 -- because a computer system went down and his trade didn't go through. Even veteran Evan Rogers cursed his monitor when it blacked out during trading last week. "Technology rules my life," he moaned.

Regardless of the potential pitfalls, for Whitlock the seduction of day trading is simple. It means the end of bosses and the possibility of buckets of cash.

In the past few years, Whitlock has done well enough in long-term investments to day trade for six months without turning a profit and still support his family. He hopes to break even for six months, trading small amounts, often not even trading at all, just tracking the market closely to see what would have happened had he made a transaction. After that he wants to make at least enough money to match what he brought home with his corporate job.

"This is a much better job for me," Whitlock said not long after he had lost the $1,600. "It gives me freedom. I don't have to check in with a boss, but I don't have any overhead."

For starters, Whitlock appreciates the regular hours. The markets open at 8:30 a.m. Dallas time and close at 3 p.m. They are closed on most bank holidays.

Whitlock had never chosen a risky path before he started day trading. Born in France, he is the son of a career military officer who started his own real estate business when he retired from the service. When Whitlock graduated from the University of New Mexico with a degree in accounting and computer science 15 years ago, he moved to Dallas to work for Ericsson, a Stockholm-based wireless telecommunications company with offices in North Texas. Whitlock moved to Nortel two years ago. "Bad group, bad boss," Whitlock says succinctly when asked why he left.

As he grew frustrated at work, Whitlock started plotting an escape. The plan calls for him to execute about two trades a day, based mostly on his knowledge of the high-tech industry as well as online briefing services, and make between $500 and $800 a day in profits. With that kind of money, he believes, he can more than make up for his lost Nortel salary and live a less stressful life.

Whitlock says he views his possible losses in this first six months of trading as tuition while he learns the game. He will quit, he says, if he loses half of the $40,000 he started with or if he hasn't started making money by six months. "I hope that doesn't happen," he says.

So far, with six weeks of trading behind him, Whitlock says he has lost about $11,000. Does his wife, who relies on his income, know? "She doesn't know how much. She knows I'm not very happy," Whitlock says. A moment later, he adds, "She's not worried. She knows I'm very disciplined in everything I do."

His decision to day trade surprised friends and family. His teenage daughter learned about her father's idea shortly after the Atlanta incident splashed across the front pages.

"'Oh no, Daddy,'" he recalls her saying. "'You are not going to be one of those crazy day traders.'"

Another member of his family, however, surprised him. Two weeks after Whitlock took the course offered by 1 800DAYTRADE.COM, he arrived one morning to find his younger brother Mitch in the trading room. "Next thing I know, he was sitting right next to me," Carlton recalls with a shudder. Although Carlton, the oldest of four boys, professes to love his baby brother, he worries that he may lose sight of his business plan with the emotional tugs from his nearby sibling.

Mitch Whitlock is a 36-year-old former car salesman and sales consultant. Asked whether he was following his brother's lead, he hesitates and then concedes, "Yeah, I guess. He was kind of the catalyst."

Since he started trading a week after his brother, Mitch has seen mostly losses too. He doesn't want to say exactly how much because he hasn't told his wife. "It's a process you go through," he says, sounding a lot like his big brother. "You're paying for your education."

In the day-trading room where they sit almost every weekday, the two brothers have witnessed both cautionary and inspirational lessons. A trader who sat beside them until two weeks ago lost his whole bundle -- $25,000. He's now looking for a job.

But behind them are the veterans. "One of them told us he's trying to get his account to $500,000 by December," the younger Whitlock whispers, a little wide-eyed about the prospect of so much money.

It's 8:50 on a Wednesday morning one week after Carlton Whitlock lost $1,600 on Phone.Com. XWhitlock, who arrived around 7 a.m., has already performed his morning rituals. He has checked his computer for tips from several online services he subscribes to and has scanned the Internet-posted CNBC guest list. (Stocks often move because some expert utters an opinion on television.) But Whitlock has not yet made any trades.

His younger brother has. "I'm more of a gambler than my brother," he says.

He's losing money.

"Oh look, I'm only down $800," he notes in a good-natured voice to his older brother, who returns a slightly disapproving look.

Since losing the $11,000 in his first few weeks, Carlton has returned to his original cautious strategy.

On a table in front of him sit his tools: a cell phone, a coffee cup, and a spiral notebook where he keeps a log of where his stock tips come from. On his computer screen are a dozen different colors and multiple graphical displays. A chart shows the current trades of any stock he chooses. Other charts show the stock's past prices on a minute-by-minute basis. Green represents an uptick and red a downtick. Red makes Whitlock nervous.

He still wears businesslike clothes (corporate casual -- khaki slacks, a striped button-down shirt, argyle socks, and loafers). "I'm getting out of the work mode slowly," he says. His brother wears jeans and a gimme cap sporting a country-music radio station's call letters.

The elder Whitlock plans to work a half-day. His teenage son is scheduled to perform at the community theater in Garland, and he wants to catch the musical during the week so he can make a weekend camping trip. "I need some time off," he says.

On his screen, he calls up DSL.Net Inc., a high-speed data company that helps set up digital technology for Internet access for small and medium-sized businesses. It has not made a profit yet -- like many of the stocks the Whitlocks and the other day traders choose to make their money from.

"It's going sideways," he says. By looking at the electronic roster of proposed buys and sells, he can tell that day traders are selling off.

"He's holding it so tight," Whitlock says about DeutscheBank, the investment firm that is one of the market makers in DSL.Net that day.

Whitlock has not clicked on his buy button yet.

By 9:05, the DSL.Net stock is again coming down. "I'm having a real hard time reading this," he concedes. He is attracted to the stock because the day before his brother made $1,200 on DSL.Net.

In the back row, one of the veterans is complaining about his wife. "After college," he says, "Naugahyde was fine. Now everything has to be leather."

Focused on his screen, Whitlock notices that some buyers for DSL.Net are offering more than sellers are asking. That's an investment strategy technically known as "dumb," the equivalent of offering a grocer $10 for a $5 bag of tomatoes.

"I think we have some stupid day traders here," says Whitlock, who is out of the market for the moment and feeling a bit cocky.

At 9:12, the veterans in the back row are talking about Data Broadcasting Communications Corp., a new Internet stock. Whitlock quickly calls up the particulars on his screen. "I made $30,000 off that stock," a voice from the back row says, "just rode her up and let her go."

Whitlock looks, but doesn't buy.

At 9:21, Whitlock looks again. Data Broadcasting's stock price -- for minutes at least -- rises almost three points. "He was right," Whitlock says with obvious awe of the veteran's ability to read the trading charts and history and anticipate the change.

A short time later, the wife of one of the back-row guys enters the office. She is slender, elegantly coiffed, a flawless enough beauty that she could pass for a model. Almost all the men on the floor manage to get a glance at some point. "I ain't doing nothing, honey, but making money," her husband tells her in a loud voice as laughter fills the room.

A computer ding sounds from the back row, and the room grows quiet. The peculiar noise, they all know, means a message has arrived in Evan Rogers' electronic mailbox from Tokyo Joe Park. A renowned figure among day traders, the online stock guru passes on tips to those who pay $200 a month for his e-mails. Rogers shares them with his fellow traders.

A 40-year-old South Korean immigrant and former owner of four Manhattan burrito restaurants, Park has a following so great now that his tips almost automatically move markets. (The SEC announced last spring that it would investigate whether Park had loaded up on shares before recommending a stock and sold them after sparking a buying spree, a shady practice known as front-running. Park insisted then that he had done nothing wrong.)

For the crowd at the trading room in Far North Dallas, however, a Tokyo Joe tip often means a fast buck. This time the tipster has recommended a company called Quorum Health Group.

Mitch Whitlock tries to buy 1,200 shares, but for some reason the computer shows he has only been sold 12. He complains out loud. A veteran trader offers cruelly from the back, "Twelve shares? Well, I got 12,000."

The stock briefly rises.

Carlton, meanwhile, has still not made any trades, though there are one or two paper victories. At about 10, he spots Metricom Inc., another start-up that develops wireless network products and services. Looking at the charts, Whitlock says, at first to himself, "It's probably going to go up." He then calls out in a bolder voice than he usually uses in the trading room, loud enough for the back row to hear. "Metricom is trying to come back."

For a moment there is silence as the back-row traders call up the company's charts on their screen. Rogers announces he's making a trade. Whitlock, who had not purchased the stock himself, smacks his fists together in celebration. "I love it when I make a good call," he says. "Of course, it would be better if I was in."

He returns his screen to DSL.Net. The stock is finally climbing past $22. "Wow, two good calls in a day," says Whitlock, "That's all I need."

It's 11:00. "It's late," Whitlock says, looking at his watch. "I didn't notice that." He has to leave now to make it to his son's theatrical performance. No trades, no profits, and no losses for the day.

The next day, Whitlock comes in for a quick peek at the market before he heads off to a camping trip with his church buddies. He even makes an actual trade -- his first in days. He buys 300 shares of DSL.Net at $20. Within minutes the stock moves down 7/16th a point. "I've lost $130," he says. "I've got to have patience."

He does and it pays off -- in small amounts. As he sweet-talks his computer ("Come on, puppy, come on") the stock price moves up enough for him to sell at about $130 profit. He clicks his mouse at the sell button. He can now see his proposed trade on the screen lined up with the others. For some reason, his proposed trade gets bumped twice out of line, getting behind other similarly priced orders. He raises his fist in frustration. He's afraid the stock price will move before his order is accepted. "I'm a control freak," Whitlock concedes in the heat of the moment. "This kills me."

Finally, his computer shows the trade has been completed. Take away the $44 dollars in transaction costs, and Whitlock has earned $90.

That's less than 0.1 percent of his previous salary, but it's enough to leave Whitlock feeling optimistic. After all, it's just one trade on one day. More important, it's not a loss. A few more successes, a few more weeks, and maybe Whitlock can survive his six months of schooling and take a seat at the table with the boys in the back row.

Maybe.

"If I had had 500 shares," he says, "I would have earned a lot more. It feels so good to make a good trade."